Bank Owned Properties still represent one of the greatest opportunities for saavy Real Estate Investors in the market today. See how it works from the inside out. This 5 part series is an entire REO Investing Course in disguise, so take advantage of these implementable strategies!
When I started in this business in 2000, the majority of the real estate deals were coming to us through distressed owners. We would market to the homeowner directly and attempt to negotiate a deal that would help all parties. We would advertise in the Yellow Pages, newspapers, and put out bandit signs to get the homeowner to call us directly. There was a very human element to it as many of those deals were made at the seller’s kitchen table. It’s called Buyer to Seller Direct. This is still a great method to use in today’s market.
In 2007, when the bottom dropped out of the market and the foreclosure crisis started, acquiring bank-owned homes proved to be the greater opportunity. Sud- denly, there were more properties on the market than ever before at prices lower than they had ever been before. Smart investors started scooping up ridiculous deals. In Florida, we started paying $30k for properties that would have sold for $125k just a few months earlier. Today, there are a ton of properties available, but limited financing and lending available. This leads to a “perfect storm” for cash investors able to scoop up good deals.
But you can’t just choose any old property. You have to know what you are doing. To be successful in identifying, acquiring, and selling these properties you need to have a system. This book will equip you with a proven system and set you on the path to success.
Consider this your Investment Boot Camp.
You need to jump into this thing full force. Tackle one obstacle at a time and take it down hard. This isn’t the fun part (that comes later when you start cashing checks), but developing a solid knowl- edge base is crucial to your success. Bust through this information, memorize it, and then move forward.
Terms and Definitions:
I know vocabulary was your favorite part of grade school, right? Well, you are in luck (at least I won’t make you spell them)! It’s important that you don’t skip over this section. You may even want to go back and review these terms a few times. You want them to become part of your vernacular. Memorize these terms and you will drastically reduce the number of times you look stupid in front of more seasoned professionals. Nothing is worse for your business than clearly not knowing what you are talking about. Don’t be that guy! I have boiled it down to the most common and important terms for you. Here we go!
Professional service provided by a registered, licensed, or certified appraiser or real estate licensee to produce an estimate of value.
Worth established for each unit of real property for tax purposes by a county property appraiser.
Person to whom a right or interest is transferred.
Written instrument that serves to transfer the rights or interests of one person to another.
Person who gives his or her legal rights or interests to another person.
The supply of available properties exceeds the demand.
The relationship between the net income from a real estate investment and the present value.
Final settlement between the buyer and seller; the date on which title passes from the seller to the buyer.
CLOUD ON TITLE:
Any defect, valid claim, or encumbrance that serves to impair the title or curtail an owner’s rights.
compensation paid to a broker or sales associate for successfully concluding a real estate transaction.
COMPARATIVE MARKET ANALYSIS (cMA):
An informal estimate of market value performed by a real estate licensee for the seller to assist in arriving at an appropriate listing price. Or if working with the buyer, an informal estimate of market value to assist the buyer in arriving at an appropriate offering price.
A real estate loan that is neither FHA-insured nor VA-guaranteed.
A rejection of the original offer by proposing a new offer, thereby terminating the original offer.
A type of conveyance; a written instrument to transfer title to real property from one party to another.
Earnest money or some other valuable consideration given as evidence of good faith to accompany an offer to purchase or rent.
DOCUMENTARY STAMP TAX ON DEEDS, STATE:
Tax required on all deeds or other documents used as conveyances. The charge is based on the total purchase price. Also called Doc Stamps.
FEDERAL HOUSING ADMINISTRATION (FHA):
Insures mortgage loans made by FHA-approved lenders on homes that meet FHA standards in order to make mortgages more desirable investments for lenders
A court process to transfer title to real property used as security for debt as a means of paying the debt by involuntary sale of the property.
A secondary mortgage market institution that buys and sells conventional, FHA, and VA loans
FREE AND CLEAR:
Title to real property that is absolute and unencumbered, no mortgage
The price paid for the use of borrowed money.
An agreement that does not convey ownership but does convey possession and use for a period of time and for compensation.
A claim on property for payment of some obligation or debt.
LIMITED LIABILITY COMPANY (LLC):
An alternative, hybrid business entity with the combined characteristics and benefits of both limited partnerships and S corporations.
LOAN-TO-VALUE (LTV) RATIO:
Relationship between amount borrowed and appraised value (or sale price) of a property.
The most probable price a property will bring from a fully informed buyer, will- ing but not compelled to buy, and the lowest price a fully informed seller will accept if not compelled to sell.
MULTIPLE LISTING SERVICE (MLS):
An arrangement among members of a real estate board or exchange that al- lows each member broker to share listings with other members so that greater exposure is obtained and a greater chance of sale will result.
Profit from property or business after expenses have been deducted; effective gross income less operating expenses.
NET OPERATING INCOME (NOI):
The resulting amount when all operating expenses are subtracted from effec- tive gross income.
An intentional proposal or promise made by one party to act or perform, pro- vided the other party acts or performs in the manner requested.
Title insurance issued for the total purchase price of the property to protect the new owner against unexpected risks.
The demand for available properties exceeds the supply.
The Cycle of an Reo Property
Now that you understand the terms, this will help you understand how the REO process flows:
Every REO was at one point owned by an individual or an entity other than the bank. The owner was likely unable to make the mortgage payment and so went into default. (At this point many people decide to pursue a short sale in order to avoid foreclosure.)
After the owner misses several payments (how many depends on the lender), the property is offered at auction. If the property does not sell, the bank takes possession of the property and assigns it to an asset manager. The asset manager typically works directly with the REO Broker, a Realtor who special- izes in foreclosures. The REO Broker lists the property and makes it available to the general public, including investors.
Stay tuned for part 2 coming soon!